March 1, 2017 / 2:31 PM / 3 years ago

Fitch Rates Brixmor's Senior Unsecured Notes 'BBB-'

(The following statement was released by the rating agency) NEW YORK, March 01 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to the senior unsecured notes issued by Brixmor Operating Partnership L.P., the operating partnership of Brixmor Property Group, Inc. (NYSE: BRX). A full list of Fitch's current ratings for BRX follows at the end of this release. KEY RATING DRIVERS The rating and Stable Outlook reflect BRX's large and diverse portfolio of 512 shopping centers, solid fixed charge coverage (FCC), and appropriate leverage for the rating level. These positive rating elements are offset by lower relative portfolio asset quality and sustained weak unencumbered asset coverage of unsecured debt (UA/UD). Leverage Declining Steadily Fitch expects BRX's leverage to improve to the low- to mid-6x range by the end of 2018 through a combination of same store net operating income (SSNOI) growth, incremental net operating income (NOI) from redevelopments, and retained cash flow. BRX's leverage for the three and 12 months ended Dec. 31, 2016 was 6.7x and 6.9x, respectively. Progressing to Fully Unencumbered Portfolio Brixmor's long-term goal is to have an entirely unencumbered portfolio and the company has made progress in repaying or refinancing maturing mortgages. 76.1% of the company's NOI was derived from unencumbered assets at Dec. 31, 2016 compared to 61.7% at year-end 2015. The company has over $300 million of mortgages maturing through the end of 2018 that Fitch expects will be repaid with cash on-hand and proceeds from unsecured bond issuances. Fitch expects the NOI of BRX's unencumbered assets will continue to cover its unsecured debt (UA/UD ratio) at a level slightly below Fitch's typical 2.0x threshold for investment-grade issuers despite the company's progress due to the interplay between the debt yields on to-be unencumbered assets and incremental unsecured borrowings. Asset Quality Below Peers Fitch considers BRX's asset quality to be at the lower end of its publicly traded peers, based on the portfolio's current operating metrics including per square foot lease signings, occupancy, surrounding population density and demographics. Fitch expects BRX to continue the program of reinvestment in its properties via redevelopment spend started under Blackstone's ownership. Longer term, Fitch expects BRX to reduce its exposure to tertiary markets by selling assets and recycling capital into primary and secondary markets where it has scale. Although BRX's asset quality is below its publicly traded REIT peers, it compares favorably with the stock of U.S. retail properties, generally. Improving FCC Fitch expects BRX's FCC to sustain within the high-2x, low-3x range through the forecast period due to higher property NOI, partially offset by higher interest costs associated with refinancing lower cost variable rate, often secured borrowings with higher cost fixed rate unsecured debt. FCC for the three and 12 months ended Dec. 31, 2016 was 3.0x. It showed limited volatility throughout the year as the company's cash interest costs declined but were balanced by growing recurring capital expenditures, specifically increased maintenance capex and tenant improvements related to the company's portfolio quality improvement initiative. Adequate Liquidity Fitch expects BRX's liquidity to remain adequate and is bolstered by limited debt maturities in 2017 before a $1 billion tranche of the company's term loan matures in 2018. The company has strategically measured its expenses related to the repositioning of its portfolio by approaching it with a long-term view and not overextending itself in any single calendar year. Simple Portfolio Management Story; No Legacy Issues BRX operates with a relatively straightforward business model that includes whole ownership of U.S.-based neighborhood and community shopping centers. The company has no material joint ventures, and Fitch does not expect the company will add joint venture equity to supplement its growth strategy going forward. Fitch expects BRX's external growth strategy will focus on anchor repositionings and redevelopment of existing centers. Stable Outlook The Stable Outlook reflects Fitch's expectation that BRX's financial profile will remain appropriate for a 'BBB-' REIT during the rating horizon. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --SSNOI growth of 2.7% and 2.6% in 2017 and 2018; --No acquisitions or dispositions during the forecast period; --Approximately $100 million of annual capital spending related to re-tenanting and redevelopment initiatives; --Approximately $300 million of combined mortgage maturities in 2017 and 2018 refinanced with unsecured debt; --Unsecured debt issuance of $1.35 billion in both 2017 and 2018; --No primary equity offerings. RATING SENSITIVITIES The following factors may collectively, or individually, result in positive ratings momentum for BRX: --Fitch's expectation of leverage sustaining in the mid-6x range (leverage was 6.9x for the year ended Dec. 31, 2016); --Fitch's expectation of fixed charge coverage sustaining above 2.3x (coverage was 3.0x for the year ended Dec. 31, 2016); --Fitch's expectation of unencumbered asset coverage of net unsecured debt sustaining above 2x (unencumbered assets - valued as 4Q16 annualized unencumbered NOI divided by a stressed capitalization rate of 8.5% to net unsecured debt was 1.7x). The following factors may collectively, or individually, result in negative ratings momentum for BRX: --Fitch's expectation of fixed charge coverage sustaining below 2x; --Fitch's expectation of leverage sustaining above 7.5x; --Base case liquidity coverage sustaining below 1.25x. Fitch currently rates Brixmor as follows: Brixmor Property Group, Inc. --Long-Term Issuer Default Rating (IDR) 'BBB-'. Brixmor Operating Partnership, L.P. --Long-Term IDR 'BBB-'; --Senior unsecured revolver 'BBB-'; --Senior unsecured term loans 'BBB-'; --Senior unsecured notes 'BBB-'. The Rating Outlook is Stable. Contact: Primary Analyst Steven Marks Managing Director +1-212-908-9161 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Stephen Boyd, CFA Senior Director +1-212-908-0153 Committee Chairperson Sharon Bonelli Senior Director +1-212-908-0581 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: Date of Relevant Rating Committee: March 18, 2016 SUMMARY OF KEY FINANCIAL STATEMENT ADJUSTMENTS A summary of financial adjustments includes adjusting the historical and projected net debt of the company by assuming BRX requires $30 million of cash for working capital purposes that is otherwise unavailable to repay debt. 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